Monetary Policy, Customer Capital, and Market Power (with D. Zeke), Journal of Monetary Economics, 2021, (121): 116-134 [Slides]
Abstract: In U.S. firm-level data, large firms increase their spending on customer capital significantly more than small firms following an interest rate decline. We interpret this evidence in a model with product market frictions where heterogeneous firms strategically advertise to build a customer base. When a firm advertises, it shifts customers’ demand away from competitors. This externality is especially severe when firms have a sizable existing customer base, discouraging smaller competitors and making them less responsive to interest rate shocks. The model provides a rationale for the rise in market concentration and market power in recent decades, while interest rates fell.
Abstract: Global value chains (GVCs) typically involve large firms exerting bargaining power over the terms of trade. We develop a novel theory of international prices accounting for these features of GVCs and illustrate their effect on the pass-through of trade shocks into import prices. We build a new dataset merging transaction-level U.S. import data with balance sheet data for both importers and exporters to evaluate the model's performance. Our estimated model generates more accurate predictions of pair-level price changes following trade shocks than standard models, improving the estimated impact of the 2018 trade war on aggregate U.S. import prices by 40-60%.
Abstract: This paper presents micro-level evidence on buyer power in input trade and evaluates its effects on the aggregate economy. I develop a framework to estimate market power in input markets when downstream firms' prices are determined through bilateral negotiations. Using trade and production data from France, I show that buyer power has a much larger impact on foreign than domestic input markets. Descriptive evidence on imported input prices reveals patterns consistent with a sizable buyer power of importers. I build an equilibrium model to explore the output and welfare implications of my estimates. Like an optimal tariff on imports, importers' buyer power can raise national income due to terms-of-trade effects, which more than compensate for losses in consumer surplus and trade volumes. In baseline calibrations, buyer power results in a net increase in welfare of about 2%.
Abstract: This paper studies the interaction between financial frictions, intangible investment decisions, and markups at the firm level. In our model, heterogeneous credit constraints distort firms’ decisions to invest in cost-reducing technology. The latter interacts with variable demand elasticity to generate endogenous dispersion across firms in markups and pass-through elasticities. We test the model’s predictions on a representative sample of French manufacturing firms over the period 2004-2014. We establish causality by exploiting a quasi-natural experiment induced by a policy change that affected firms’ liquidity. Our results shed new light on the roots of rising markups and markup heterogeneity in recent years.